Sin Tax Won't Fix Underlying Problem

July 14, 2011

There is a sense of bitter irony in Democratic Minnesota Gov. Mark Dayton's new cigarette tax proposal, which is aimed at bridging the Gopher State's budget gap. In 2005, then-Gov. Tim Pawlenty used an increase in cigarette taxes -- which he called a "user fee" -- to solve a state budget crisis that had shut down the government. Yet today Minnesota finds itself right back in state finance hell, say Anthony Randazzo, director of economic research, and Carson Bruno, a research assistant, at the Reason Foundation.

Lost in the shuffle is the fact that Pawlenty's "user fee" and Gov. Dayton's proposed pack attack are problematic for more than just political reasons.

Trying to cover a budget shortfall with a cigarette tax -- or any sin tax -- is an irresponsible idea.

Taxes on cigarettes tend to drive business out of state and yield unreliable revenue, which only creates future budget woes.

And cigarette taxes are not user fees -- since the specific tax revenues are not used on services for smokers, but instead go towards general state spending.

Even if the proposed tax were accepted and the budget passed in Minnesota, the state could be right back where it started within just a few months.

Additional revenue from Gov. Pawlenty's 2005 tax increase was estimated to generate $174 million per year, but Minnesota's cigarette tax revenue has only increased by an average of $4 million per year -- a paltry 2.72 percent of the estimate.

And Minnesota isn't alone: A 2008 Maryland cigarette tax increase only yielded 50 percent of projected additional revenue while cigarette tax revenue in Illinois has decreased by $69 million since 2007.

Overall, only 30 percent of cigarette tax increases between 2003 and 2007 have met revenue projections.

Minnesota has a spending problem, as do a number of other states facing budget gaps for next year. It is time for governors and state lawmakers to take a cue from the Minnesota déjà vu and recognize that taxing cigarettes won't solve the underlying problem.